Property 2019

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<p>It's well known that most <a href="http://petewargent.com/2019/01/10/being-approximately-right-not-precisely-wrong/" target="_blank">market predictions</a> are a <a href="http://petewargent.com/2018/01/04/forecasting-fails/" target="_blank">waste of time</a>: they usually just project <a href="http://petewargent.com/2019/01/02/the-small-numbers-fallacy/" target="_blank">more of what's been happening</a>, and are rarely much chop at picking turning points. </p>
<div>With almost no housing market activity over the long Easter break, this does feel like a potential <a href="http://petewargent.com/2018/01/07/tipping-point/" target="_blank">inflection point</a> - for better or worse - and certainly it's as a good a time as any for a largely baseless opinion piece. </div>
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<div>It's clear that the speculative heat has been well and truly removed from the housing market by the credit squeeze and a range of other factors. </div>
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<div>In fact, the reverse is now the case, with investor credit growth running at the lowest level in Australia's history.</div>
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<div>The stock of interest-only loans has been spectacularly reduced by regulatory tweaks and is also at the lowest share on record: probably down to about 21 per cent of residential loans by value by the end of this quarter, representing an epic decline from 39 per cent in early 2017.</div>
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<p><span>The share of high LVR lending is also tracking at around the lowest level on recent record.</span></p>
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<p><br><span>Low-doc lending, meanwhile, has been all but eliminated over the past decade. </span></p>
<div>Average paper net rental losses (aka. 'negative gearing') claimed are at the lowest level in almost a decade-and-a-half, with further declines in the post on rising yields, lower mortgage rates, and changes to allowable deductions for plant and equipment depreciation and travel. </div>
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<div><span>With loans being tested for serviceability at 7¼ per cent lending metrics have, if anything, become too conservative, and borrowing capacity has in many cases been reduced by 20 to 40 per cent (or simply eliminated entirely for many portfolio investors).  </span></div>
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<div><span>Almost every way you look at it, credit has rarely been so tough to come by. </span></div>
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<div><strong><span style="text-decoration: underline;">Prices cooled since early 2017</span></strong></div>
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<div>If the housing market downturn was to end here then I reckon most sober commentators and respected international observers would applaud a job well executed. </div>
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<div>In any event, a lot of the 'bubble' talk is way overdone.</div>
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<div>There's a lot of debt on a gross basis; but mortgage serviceability isn't particularly stretched, while there's also been an unprecedented build-up in cash and cash equivalents, mortgage buffers, and balances in offset accounts.</div>
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<div>In Adelaide it's not all that hard to buy a house for the same price as a decade ago, which given where mortgage rates have gone must represent about a 50 per cent improvement in affordability (without backing this statement up with any hard numbers). </div>
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<div>In Brisbane apartment prices are often seen to be lower than they were almost a dozen years ago, so affordability is now stupendously high compared to where it was. </div>
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<div>Housing prices had already declined for years in Perth; and they've been roundly smashed in Darwin.</div>
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<div>The major house price gains since 2012 were seen in Sydney, where median prices have since declined over a period of more than two years by about 13 per cent, representing a real decline versus incomes nudging about 20 per cent from the peak (much more in parts of Western Sydney, according to a piece in the AFR this week). </div>
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<div>It seems that most of the regulatory actions taken to cool the housing market have all but washed through, but despite the lower fixed mortgage rates on offer lately market activity is still awfully gummed up.</div>
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<div>And there's still a non-trivial possibility that the actions taken to promote financial stability, in the end, sink it. </div>
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<div>The economy has been stymied for some time now, with two consecutive quarters of negative GDP growth in per capita terms possibly set to be repeated for a third quarter. Consumption and retail are weak. </div>
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<div>It's difficult to get an accurate real-time reading of housing market turnover but many experienced commentators seem to believe it's at the lowest level on record. </div>
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<br>So, what gives?</div>
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<div><strong><span style="text-decoration: underline;">Responsible lending: level up</span></strong></div>
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<div>A major part of the challenge for activity in the housing market is some of the breathtaking pedantry related to mortgage applications, which I've experienced a bit of, but often only mortgage brokers have a really good feel for. </div>
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<div>There's always a chance that responsible lending morphs into a nanny state mentality, and this is now almost literally becoming so in some cases.</div>
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<div>When lenders are stress-testing for scenarios incorporating up to the equivalent of a dozen or more rate hikes it defies belief that a homebuyer registering for Netflix or using Uber might be grounds for the refusal of a loan, but the banking Royal Commission brought this level of paranoia to the fore. </div>
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<div>These sometimes amusing and apparently trivial examples are merely the tip of the iceberg in what has been at times a truly Titanic pile of administrative poppycock.</div>
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<div>Everyone involved in mortgage lending knows that consumer behaviour and discretionary spend changes post-purchase, so all this rigmarole is largely fruitless and may now be effectively adding to FS risks rather than reducing them. </div>
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<div><strong><span style="text-decoration: underline;">Tipping point</span></strong></div>
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<div>Lower interest rates alone don't fix this; but in truth I don't know what does. </div>
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<div>Maybe it's the simply passage of time.</div>
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<div>Perhaps lenders need some assurance that they aren't going to be hauled over the coals even more than has already been the case. </div>
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<div>By the same token prospective homebuyers would doubtless like to see more certainty given the recent shifting of goalposts (with further changes to market dynamics now proposed by the Labor Party). </div>
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<div>Whatever's the case, something needs to get mortgages flowing dependably again, or else there's a risk that the measures to shore up risks in the housing market will no longer be hailed as a success, but instead blamed for capsizing it.</div>
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<em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em><span> </span>
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Speculative heat removed from the housing market by the credit squeeze: Pete Wargent

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<p class="post-title entry-title">EXPERT OBSERVER</p>
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<div>In May 2018, I noted that I didn't think we'd end up with a major housing crunch.</div>
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<div>Part of my reasoning was that 'lenders gonna lend'.</div>
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<div>In other words, just as we've used a knife and fork for more than 800 years, Australia's financial system has been deregulated for decades, and we still have four major banks, all of which need to lend money to make money.</div>
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<div>I felt this would insulate the housing downturn, despite the heavy macroprudential changes.</div>
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<div>What wasn't so clear at that time, at least to me, was the full impact that the Royal Commission would have on the appetite of lenders. </div>
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<div>In the event, a full seven rounds of public hearings was played out in front the media throng, and the final report wasn't delivered until last month.</div>
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<div>Accordingly there have been some nervous operators over the past year or so, and there was a very noticeable impact on mortgage processing and practices. </div>
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<div><strong><span style="text-decoration: underline;">Policy moves</span></strong></div>
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<div>The RC final report being submitted only in February 2019, this is all very much fresh in the memory, so any loosening of the credit taps is likely to be gradual.</div>
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<div>But still, with a smaller mortgage pie to be shared around - lending volumes are down by a fifth from a year earlier - and major banks having lost market share in recent years, I believe there will be some policy moves to win business and get mortgage book growth back into positive territory.</div>
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<div>It's only March, bear in mind, the month after the final RC report, but today we saw the first interesting move of any note, from ANZ Bank:</div>
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<div>90 per cent LVR investment mortgages with a 10-year interest-only term should generate a bit of welcome business for ANZ (not to mention profit, since rates and have tended to be higher on IO mortgages). </div>
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<br>And ANZ has generally been one of the more proactive lenders of late.</div>
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<div>Some context is due.</div>
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<div>Borrowers taking this option on a 10-year IO mortgage will see sundry borrowing capacity hampered, due to the way in which this mortgage debt is assessed.</div>
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<div>And, indeed, most IO loans don't run for 10 years. </div>
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<div>But it's a nice cushion for borrowers seeking IO certainty, and moreover it's the first positive signal of competition returning for investor borrowers. </div>
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<em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em><span> </span>
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Credit to loosen a little: Pete Wargent

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<div>EXPERT OBSERVER</div>
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<div>With the blindingly obvious caveat that an index doesn't denote anything meaningful for individual properties, metropolitan housing prices are now rising again. </div>
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<div>Sydney and Melbourne home values both rose over the week for the first time since all the way back in 2017, with a 0.3 per cent gain for Sydney, and a marginal increase in Melbourne. </div>
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<span>Commonwealth Bank CEO Matt Comyn reported the largest volume of loan applications in six months this week, now that the looming threat of wholesale changes to taxation has been extinguished. </span><br><span><br></span><span>Whether or not those loans are approved on a timely basis...let's see. </span>
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<span>The bottom's been 'n' gone in the established housing market, but ne</span><span>w dwelling markets still have a long way to clear. </span>
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<div><span>It was interesting to note during the downturn phase that all those old real estate clichés about there 'always' being a level of competition for A-grade stock did to a large extent hold true.</span></div>
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<div>In saying that, some investors still got battered by paying wildly inflated prices during the frenzied peak, or through overcapitalising. </div>
<p><em><strong>PETE WARGENT</strong> is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em><span> </span></p>
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The property rebound is on: Pete Wargent

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<p>The spring auction selling season is over, with just three more Saturdays until the summer holiday hibernation.</p>
<p>There were three marked trends observed during the past three months with the property market going down like a wrought iron kite.</p>
<p>Firstly there was a drop in auction offerings as potential vendors decided it was not worth their while to list.</p>
<p>Secondly the Sydney clearance rate, which bounced around, weakened overall from 50 percent plus results to somewhere in the 40s.</p>
<p>Then was the inevitable accompanying price decline.</p>
<p>There were no real surprises in this emerging auction landscape.</p>
<p>The bidding over-exuberance that we all saw for an extended period in the sellers' market between 2012 and 2017 has almost completely disappeared, but there are still some red hot results.</p>
<p>The pendulum has swung to the other extreme of utmost buyer caution. </p>
<p>We now have a buyer's market, except they can't all buy what they previously thought they could afford because the bank's knee-jerk reaction to the exposure of some reckless lending exposed by the banking royal commission.</p>
<p>I wrote recently that a couple with one child and a dual income of $120,000 could borrow $800,000 during the boom.</p>
<p>Fast forward and the same couple, now with a a little wage growth to a $129,000 combined salary and another child, can only borrow $680,000 because of stricter bank lending.</p>
<p>Their capacity to buy has gone backwards.</p>
<p>We are now actually four years into the attempts by the Australian Prudential Regulation Authority, to curb over zealous lending, which was turbo-charging price growth.</p>
<p>The banking regulator's initial measure was imposing a 10 per cent speed limit on the growth in lending to investors. The cap was scrapped in April with APRA saying it had served its purpose. The reaction had already come from investors who have stopped buying in droves given the expectations of lower prices makes housing less attractive.</p>
<p>APRA's next measure that reduced the occurrence of interest only (IO) loans is proving to be the real sleeper in why prices are down, and likely to stay down for some time.</p>
<p>The regulator wisely decided IO loans needed to be constrained to preserve overall financial stability.</p>
<p>Interest-only, along with the tax deduction of interest payments via negative gearing, certainly made financial sense for many investors.</p>
<p>But the banks were reckless in encouraging ordinary home buyers to ditch the conventional interest and principal loan.</p>
<p>There was a lot of upsizing to bigger pricier family homes that only happened after getting an interest only loan.</p>
<p>For a $750,000 home loan the monthly repayment of $4,174 fell to $3,325 if only the interest was being repaid for the first few years.</p>
<p>Now IO buyers, who amplified the housing price cycle, helping push prices up, have mostly gone.</p>
<p>And for the next few years exisiting interest only borrowers will likely need to get out before the loan automatically switches back to the higher rate, so there is an increased risk of continued price deflation.</p>
<p>Throw in the uncertainty over negative gearing policy and the property market is understandably going to be skittish as 2019 kicks off.</p>
<p>There's likely to be a further compounding of bank caution flowing from the February 1 final report of the banking royal commission. Then we have the NSW state election followed by the disruptive Federal poll.</p>
<p>We shall see a return to normal market conditions sometime.</p>
<p><em>This article was first published in the</em> Saturday Telegraph</p>
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Expect a skittish start to property in 2019 in Sydney

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<p>EXPERT OBSERVER</p>
<p>Housing weakness in late 2019 was clearly not confined to just turnover and prices with new dwelling approvals sliding sharply into year end – down 26% between Sep and Dec, the last month marking the lowest level for monthly approvals since June 2013. For Q4 as a whole, approvals were down 10.9%qtr and 23.7%yr.</p>
<p>Approvals are now signalling an unambiguous further weakening that will clearly see declining new dwelling investment detract from Australia’s growth in 2019. Westpac expects new dwelling investment to decline 8% in the year with a further 5% contraction in 2020.</p>
<p>The composition of the approvals decline points to downside risks to this outlook. Units continue to drive the cycle with a further 18.8% drop in Dec to be down 38%yr. Within this segment, ‘high rise’ approvals look to be down a further 16% in the month and by over a third in Q4 as a whole. That is outpacing our assumed path of a cumulative 40% decline by the end of 2019, suggesting weakness may be more pronounced and/or 'front loaded'.</p>
<p>More importantly, there continues to be significant weakness in other segments as well – medium density approvals down over 10% in the month and private detached house approvals down –2.2%mth, –11.3%yr. The shorter ‘lags’ on non high rise work means these declines will likely impact activity through the first three quarters of 2019.</p>
<p>The state breakdown shows weakness spread across the major eastern states: NSW –8.1%mth, –21%yr; and Vic –8.1%mth, –23%yr; and Qld –5.8%mth, –29.7%yr. WA posted a slight gain but is also down 30%yr.</p>
<p>The total value of renovation approvals rose 3.1% to be about flat on a year ago but with a modest uptrend in place. While the rise is mild, it is coming across all the major states.</p>
<p>The total value of non res building approvals fell 9.8% to be down about 15%yr. Latest monthly reads have been choppy around a flat trend, albeit with better gains for NSW and Vic and, by sector, for education-related building in the public sector.</p>
<p>Overall the December approvals update clearly challenges the RBA's view from the November Statement on Monetary Policy that "... dwelling investment is expected to decline gradually" and suggests that, as well as incorporating the weaker starting point from the Q3 national accounts, its revised forecasts to be released in Friday's February Statement on Monetary Policy will also need to materially lower the near term outlook for dwelling investment.</p>
<p>Even if the Reserve Bank maintains its view that the negative 'wealth effect' spillovers from falling house prices will be limited, there is a clear ‘real economy’ negative coming through via new dwelling investment.</p>
<p><em>MATTHEW HASSAN is a senior economist at Westpac</em></p>
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A clear ‘real economy’ negative coming through via new dwelling investment: Matthew Hassan

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<p>EXPERT OBSERVER</p>
<p class="article-details">The Governor chose to repeat the statement’s concluding paragraph which explains the policy decision with the same words that he used in December despite lower forecasts and recognition of downside risks.</p>
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<p>As expected, the Board of the Reserve Bank decided to leave the cash rate unchanged at 1.5%. At the February meeting, the Board discusses the executive’s revised forecasts which will be released in the February Statement of Monetary Policy on February 8.</p>
<p>However, in recent statements, the Governor has provided readers with growth and inflation forecasts and this was repeated in today’s statement.</p>
<p>For 2019, forecast growth has been revised down from 3 ¼ per cent to 3 per cent, and 2020, from 3 per cent to “a little less” due to slower growth in exports of resources.</p>
<p>It is important that this 3 per cent growth forecast is above the assessed trend rate of 2 ¾ per cent, and the implied 2020 forecast is likely to be around trend.</p>
<p>If a central bank is forecasting above trend growth, then it is highly unlikely to adopt an easing bias, and indeed the chances are still likely that the Governor will persist with his assessment that even though rates are likely to remain steady for some time, the next move is likely to be up.</p>
<p>The inflation forecasts were also revised with the underlying inflation forecast for 2019 reduced from 2 ¼ per cent to 2 per cent, while the 2020 forecast remains at 2 ¼ per cent. Hence the Bank is maintaining the view that inflation will gradually move into the 2 to 3 per cent band, although it will take somewhat longer than previously expected.</p>
<p>There are good reasons why the Bank lowered its growth forecasts. Firstly, while it still assesses the outlook for global growth as “reasonable”, it recognises that “downside risks have increased”. Secondly, it has made some significant changes around the household sector and housing.</p>
<p>For some time, Westpac has argued that the fall in house prices in Sydney and Melbourne will be associated with a negative wealth effect.</p>
<p>In the RBA’s previous writings, they tended to dismiss any wealth effect, but in today’s statement the Governor notes “the main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities”.</p>
<p>In linking house prices with household spending, he appears to be recognising the risk of a negative wealth effect.</p>
<p>Westpac has also argued that residential housing construction will be a drag on growth in both 2019 and 2020. The RBA has not supported that view, referring to a strong pipeline. But, recent falls in dwelling approvals, including for detached housing, clearly point to a significant drag on growth from the housing construction downturn.</p>
<p>The statement continues to point to “rising business investment” which in the December statement was linked to “business conditions are positive”. The Governor has obviously decided that the strong negative signal from the recent NAB business survey was insufficient at this stage to review the business investment outlook.</p>
<p>Given that the survey was taken in early January, Westpac thinks that approach is reasonable but there will be considerable interest to see whether future surveys send a more positive signal.</p>
<p>The Governor maintains his positive rhetoric around the labour market and confirms its forecast that the unemployment rate will fall to 4 ¾ per cent by the end of 2020. He also expects a further lift in wages over time, supporting household incomes.</p>
<p>Financial conditions in the US attract some attention, although the recent sharp decline in equity prices is noted to have been partly reversed. He also observes that market participants no longer expect the FOMC to be tightening monetary policy.</p>
<p>The Sydney and Melbourne housing markets are assessed as “going through a period of adjustment”, and credit conditions have tightened.</p>
<p>This is the approach which he has taken in previous statements but it is very significant that he has begun to recognise a potential wealth effect, meaning that the price adjustment may have implications for the real economy.</p>
<p>With a more cautious view on the wealth effect and recognition that dwelling construction will contract, Westpac’s GDP forecast for 2019 and 2020 is 2.6%, with recent data releases pointing to downside risks even for those modest numbers.</p>
<p>Finally, the Governor chose to repeat the concluding paragraph which explains the policy decision with the same words that he used in December despite lower forecasts and recognition of downside risks.</p>
<p>Notably, it includes the sentence “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”</p>
<p><strong>Conclusion</strong></p>
<p>With these revised forecasts, the RBA is clearly less comfortable with its previous positive outlook. Its growth forecasts remain significantly above Westpac’s own view.</p>
<p>With our forecasts of 2.6% growth in 2019 and 2020, it still seems that the more likely outcome will be for steady rates, even if as we expect, the RBA will eventually have to adopt growth forecasts much closer to Westpac’s current view.</p>
<p>Westpac confirms its long-held forecast that the RBA cash rate will remain on hold in 2019 and 2020.</p>
<p><em>BILL EVANS is the Chief Economist for Westpac</em></p>
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Reserve Bank lowers growth and inflation forecasts but remains confident: Bill Evans

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<p>Short term weakness in 2019 house prices seems assured as the tight credit conditions and restrictive monetary policy settings constrain demand, according to economist Stephen Koukoulas.</p>
<p>"Nationwide prices may drop 5 per cent by the September quarter, with sharper falls likely in Sydney and Melbourne," he forecasts.</p>
<p>"Late 2019 will be the likely trough in house prices as easier monetary policy unfolds, there is a step up from previously frozen out first home buyers and the strength in demographic demand as fresh supply falters in line with the slippage in building approvals are all likely to put a floor under prices.</p>
<p>His call envisages a 5 per cent drop over first half of 2019 and then a 2 per cent rise in the second half.</p>
<p>"2020 might see a 3 per cent house price lift," he speculates.</p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/1/1/Strip%20ad%20keep%20up%20in%202019.jpg" alt=""></p>
<p>He recently wrote on <a href="https://au.finance.yahoo.com/news/dont-look-now-almost-certainly-poorer-year-ago-211934583" target="_blank">Yahoo Finance</a> that if you are a home owner in Sydney, Melbourne, Perth or Darwin and if you have a superannuation nest egg, the odds are you are less wealthy today than you were a year or two ago.</p>
<p data-reactid="25">He noted the Australian stock market, where the bulk of superannuation assets are likely to be invested, had slumped 11 per cent since August, reducing the value of stocks by around $200 billion. </p>
<p data-reactid="27">"At the same time, home owners in Sydney, Melbourne, Perth and Darwin are seeing the value of their homes getting crunched.</p>
<p data-reactid="28">"Here are some examples. </p>
<p data-reactid="29">"A house in Sydney that was $1 million in July 2017 is now worth around $890,000, a loss of $110,000 in 18 months.</p>
<p data-reactid="30">"In Melbourne, a house that was $800,000 in early 2018 has lost around $50,000 in value, to now be worth around $750,000.</p>
<p data-reactid="31">"In Perth, the situation is more parlous. Prices have dropped 15 per cent since late 2014, meaning that a property that was $600,000 in 2014-15 has lost close to $100,000 in value to be worth just over $500,000.</p>
<p data-reactid="32">"Ouch!"</p>
<p data-reactid="38">He suggests as the loss of wealth filters through to more and more householders, or perhaps when they see the house around the corner not sell for months and when if finally does, the price is a shock, consumers will likely scale back their spending, rebuild savings and be generally cautious in their approach to spending in 2019.</p>
<p data-reactid="39">"This will undermine growth in the economy."</p>
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